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CEO's Speech Contact Energy Annual Meeting


Chief Executive Officer’s Speech Contact Energy Annual Meeting Of Shareholders Dunedin, 17 February 2004

(Slide: Steve Barrett, CEO)

Thank you Phil. It is indeed a pleasure to be here in Dunedin.

Earlier this morning, we announced a strong start to this financial year, reporting a profit after tax for the first quarter, ended 31 December 2003, of $27.5 million.

This is a solid increase on the $18.4 million earned in the first three months of the last financial year which largely reflects the significant growth in the business over the last year.

Without dwelling at length on the first quarter, let me say that three key factors driving the result were:

the addition of Taranaki Combined Cycle power station to Contact’s generation portfolio (acquired during the second quarter of the last financial year); higher average wholesale prices during the period ($ 41.83 per megawatt hour versus $32.01 in the first quarter of the previous year); and strong retail sales growth.

The first quarter shows Contact continuing to derive benefit from investments made in previous years in new customer acquisition and generation assets.

Earnings before interest, tax, depreciation and amortisation (EBITDA) of $101.5 million in the period also largely reflected the substantial growth of the business.

Total electricity and gas revenue at $296.7 million was 20 per cent higher than in the first quarter of the previous financial year, and total electricity generated rose by 31 per cent during the quarter.

Total revenue from external gas sales continued to fall, mainly because we have reclassified sales to the Taranaki Combined Cycle plant at Stratford. Before we owned that plant, these were counted as external wholesale sales. They are now internal sales for electricity generation.

If any proof is needed that the retail electricity market remains competitive, Contact has been experiencing significant competitor activity in some areas in recent months.

While retail sales volumes for the quarter increased, we experienced a loss of approximately 6,000 electricity customers between 30 September 2003 and 31 December 2003. The company had 515,000 electricity customers at the end of the quarter.

We continue to pursue a strategy of growing generation capacity and retail demand in balance.

As a result, we have been refocusing our marketing activities to place greater emphasis on customer retention and loyalty programmes.

(Slide: TCC Boosts Generating Capacity)

The addition of the Taranaki Combined Cycle power station to our generation portfolio tends to lift the first quarter result, as we did not have this asset at the same time in the prior year. But the latest result shows clearly the value that TCC brings to the Contact business as a whole.

The new plant increased our generation capacity by around 20 per cent. It also allowed us to continue to pursue strong growth in our retail customer base.

Notwithstanding the competitor activity noted above, we have around 600,000 customers today, compared to 500,000 a year ago and 400,000 two years ago.

This growth in customer numbers is a remarkable achievement and further evidence of lively retail market competition. We won almost every one of those new customers from our competitors.

Contact has learned some valuable lessons over the past three years as it sought to increase its customer base.

(Slide: Exporting Retail Knowledge to Victoria)

We now see an opportunity to export this knowledge and experience across the Tasman.

You will be aware that we have long regarded Australia as important because of its proximity, similar institutional structures and its regulatory and political environments. As we approach the limits of growth in New Zealand, it is a natural market for us to seek new growth.

We have been looking at such opportunities for growth in Australia for three years or more, but we have been quite particular.

We have looked for investments that will continue our efforts to develop an integrated energy business model in Australia based on the business we have built [check reading ease of based, business, built] in New Zealand. In doing so, we have not rushed in, but recognised that this cannot happen overnight. It needs to occur in a staged and prudent manner.

For last 12 months, we have been working quietly on a retail initiative that in many ways is designed to replicate the success we have had with Empower, the brand we have used to drive retail customer growth in New Zealand over the last three years.

A key pre-requisite to such a move has been a secure and flexible energy supply to back the retail operation.

I’m very pleased to be able to announce today that we have signed a long-term agreement with a major Australian generator to provide just such an energy supply. We are therefore able to plan the prudent creation of a retail customer base there.

We are now in the process of obtaining regulatory consents and although we have been given every reason to expect that those consents will be granted, we are awaiting confirmations at present.

We expect therefore to launch a retail offering to Victorian householders later this year.

This is a modest and measured move into the Australian market. We are not expecting to take over the town. But we see a significant, profitable niche to build a business that will offer longer-term growth opportunities for the company.

We have consistently talked about growth opportunities in Australia. Our success in building a strong retail presence in New Zealand gives us every confidence that this move across the Tasman makes sense.

I have provided all the detail that I can for the moment on this initiative, but you will be kept up to speed as our plans are implemented.

Turning back to New Zealand:

(Slide: Wholesale Electricity Prices Graph)

We used to say that Contact was a company that performed well in cold, dry years when wholesale electricity prices and general demand for electricity were high. Warm, wet years would conversely suppress demand for electricity, and prices.

This slide shows average wholesale electricity prices for the past four years. As you can see, it’s been a bit of a roller coaster ride.

As a company that sold substantial amounts of its generation into the wholesale spot market in the past, Contact was vulnerable to this price volatility and a degree of unpredictability in its earnings.

Our decision to grow significantly our retail customer base has not only changed this situation dramatically, but also fundamentally altered the way we see the business.

(Slide: Contact logo)

Today, around 90 per cent of the electricity we produce is pre-sold to our retail customers or to large companies on fixed prices.

This shields Contact - and our customers - to a large extent from the short term ups and downs of the wholesale market. For Contact, this means greater certainty of earnings. For our customers, it means relatively predictable electricity bills.

This integrated energy business strategy has served the company and its customers well and we are therefore committed to future growth on the same basis. In practical terms however, that means any substantial growth in our retail customer base is dependent on the company increasing its generation capacity.

This is the problem with which Contact and NZ are currently grappling, and which the chairman has just addressed in some detail. Let me spend just a moment more on what we are doing right now to ensure that our growth in New Zealand can continue.

New Zealand’s economy is growing strongly and this means demand for electricity is growing as new homes are built and new businesses grow.

While that should spell good news for an energy company, it does not automatically translate to growth opportunities for Contact.

New Zealand could be running short of electricity to meet demand before the end of this decade – well before then if we are unlucky and experience dry weather. And if new generation facilities such as Project Aqua are not built, the likelihood of shortages in the medium term will be all the greater.

Although this signals clearly the need to build new generation plant, the big stumbling block to such investment remains determining which fuel and technology we will use for this much-needed plant.

(Slide: Key Drivers of Supply Decision)

In seeking answers to this central question, we must take account of three critical – and competing – factors, namely:

Price Environmental impact, and Security of supply.

As a major owner of gas-fired generation facilities, and with resource consents already in place to build two more such plants, we are naturally highly focused on the thermal fuel options that may exist.

Natural gas has provided the vital underpinning of New Zealand’s hydro-dominated electricity system, with between 30 and 40 per cent of total generation coming from this source in recent years.

These gas generation resources have provided important baseload generation as well as back-up options which can be called on as and when they were needed. Most of the gas to power those plants has come from the Maui field, which is running down.

The developments of the new Pohokura and Kupe fields are proceeding slowly and we know that these sources will not be sufficient to fill the whole energy gap. The best solution would be a new gas find but time is running out for that, and exploration activity remains small-scale while players continue to delay development of known resources.

Contact has, therefore, taken the prudent step of examining LNG – or liquefied natural gas – as an option to supplement local natural gas as the Maui field runs down.

We have commenced a joint feasibility study with Genesis Power to assess the merits of LNG as an alternative fuel.

Like natural gas-fired generation, power stations running on LNG have lower carbon emissions and greater efficiency than coal-fired plant. It is widely available internationally and could easily be used as a substitute for indigenous gas in our gas-fired power stations.

However, LNG is a new fuel to New Zealand and would require new handling and storage facilities. These would be large-scale investments that would almost certainly require contributions from more than one party.

We are also undertaking our own study into the feasibility of coal-fired power stations. We need to understand this as much as any other option, so that we can weigh up the security, environment and cost implications of different fuel and technology choices and make the best alternatives available for New Zealand.

And no matter what happens on the LNG or coal front, there will be renewable technologies developed which will affect demand for LNG and other thermal fuels. However, we believe these will make a comparatively modest contribution to total electricity supply.

So, there are solutions to New Zealand’s future energy needs but there is no single silver bullet.

We are working to try to secure the best combination of options, and the studies we have commissioned into LNG and coal will put us in a better position to understand the trade-offs that will need to be made.

In the meantime, we have already made some moves to increase our generation capacity.

(Slide: Increasing Generation Capacity)

We have restored oil-burning capability to our New Plymouth plant, allowing it to run on oil in the event of natural gas shortages. We are awaiting resource consents for this but it is expected to be available in the event of power shortages this winter.

We are adding a binary plant to our Wairakei geothermal station. This will increase the efficiency of the plant, allowing us to boost output from the same amount of geothermal resource. The plant is due for commissioning in June 2005.

We have gained approval, subject to the confirmation of our new resource consents, to make full use of the available capacity from our Clyde dam through more efficient use of water flows.

We have also leased to the Crown our Whirinaki site in Hawkes Bay to construct a diesel-fired power station that will be used in times of electricity shortages. The Crown owns the plant, although Contact will manage the project and receive fees for this service and the lease of its land. The plant is expected to be available for use this winter, if required.

We are also examining the potential to add new generation capability at the existing control gates that we operate at Lake Hawea. Between 8 and16 Megawatts of hydro production is considered possible by installing a mini-hydro plant using the head created by the dam at Lake Hawea.

This would use the existing river flows and could be achieved at a cost of between $15 million and $30 million, depending on which of the two options we chose.

If we were to proceed with a development at Hawea, this new generation capacity could be commissioned as early as winter 2006, depending on resource consent requirements.

The project would be a useful addition to generating capacity and could be achieved with minimal impact on the way that Contact currently manages the lake levels and river flows from Hawea.

These steps all contribute to increased generation capacity and provide greater flexibility as we enter a period of uncertainty surrounding fuel supplies.

In focusing on the problems ahead, it is often easy to overlook successes.

I want to pay tribute to all my senior managers and staff. Contact made a significant number of achievements in 2003, facing challenges with a determination and professionalism of which you should be proud.

(Slide: Contact leads in 2003)

We purchased the Taranaki Combined Cycle plant, the largest single transaction in the company’s history; We added some 65,000 customers to our retail business; We integrated Empower under Contact’s direct management; In a single day, we transferred the company’s entire Information Management infrastructure to a new site – a major project requiring significant risk management. It was not for nothing that our Chief Information Officer, Iain Graham, was named Computerworld’s 2003 Information Manager of the Year; Contact was a strong supporter of the industry’s response to the threatened power shortages of winter 2003; We encouraged our customers to save power, distributing some $2.5 million to regional charities as a reward for reducing power consumption;

(Slide: Dunedin benefits from power savings) Typically, the people of Dunedin and Southland rose to the challenge, responding to our call for you to reduce power use and earn money for your region.

Dunedin reduced power consumption by 10%, earning $400,000 in donations from Contact for worthy local causes.

These donations are being used to help upgrade water treatment facilities at the Otago Therapeutic pool and to assist with conservation efforts for the Yellow Eyed Penguin.

They are also funding home nursing, training and patient services for the Otago Community Hospice Foundation.

Donations are also allowing the Otago Youth Adventure Trust to offer breaks for families under stress, while further funds have been given to the Otago Advisory Support centre for a range of services.

We applaud the efforts of our customers in Dunedin in meeting this challenge and are delighted to be able to reward that effort by supporting these worthwhile causes.

(Slide: Regulatory uncertainty)

Although the savings campaign helped to avert any winter power cuts, the shortages heightened political concerns about electricity. This led to the Government’s announcement of a new Electricity Commission.

The Commission has general oversight of electricity supply and is specifically charged with ensuring adequate reserve generation is available in the event of power shortages.

Contact supports the Government’s desire to ensure a secure electricity supply. However, we are concerned that the Electricity Commission has been given powers that could extend well beyond this objective.

At this point, it is unclear how such powers will be applied. This creates even further uncertainty for the electricity industry at a time when we are already bedeviled by unknowns.

We have uncertainty about the capacity of the Resource Management Act processes to allow the timely development of much-needed new generation and fuel supplies.

We have uncertainty about how the Government’s new carbon tax regime will work.

And now, uncertainty about how a new Government entity will affect the industry.

As we search for timely, commercially viable solutions to future supply problems, we urgently need Government to clarify its position on all these fronts.

We need to understand whether resource consents will be achievable in a more timely way, the likely impact of a carbon tax, and clarity on the extent of the Electricity Commission’s powers.

We estimate it would take five or six years to build a new LNG or coal plant and probably longer for a hydro or wind powered plant. Without answers to these questions, on top of the other unknowns, we risk further delaying our commitment of the hundreds of millions of dollars for new plant that will be required in the next few years.

While we can see potential electricity shortages looming in three to five years, it would take several years to gain the necessary consents for a new LNG facility. Then it would need to be built.

Although Contact has two sites with resource consents to build a gas fuelled station, the absence of a fuel to run such plant means we cannot commit the half billion or so dollars required.

This all introduces a sense of urgency to our timetable for decisions.

In a nutshell, it means we must decide in the next 12 to 18 months what investment will be made in new generation.

And, to make these decisions, the electricity industry needs some answers from the Government soon.

(Slide: Contact logo)

Although our response is not yet clear, Contact is absolutely determined to meet its responsibilities to customers by providing a reliable and affordable source of energy.

We are determined to remain New Zealand’s leading integrated energy company. You can be confident that the solutions we ultimately provide will further cement our position and pave the way for continued profitable growth.

Finally, I want to take the opportunity to encourage you to meet some of our people, who are here today.

All the five members of my Senior Management Team are present today, along with a large number of other Contact Energy staff who have helped to bring you this Annual Meeting.

We are all wearing name badges and I hope that, when we break for refreshments, you will take the opportunity to seek us out, talk to us about our company, and get a sense of what a strong team we are.

Thank you very much.

Over to you Phil.

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